Monthly payments or a lump sum?

Q:I'm 60 and have just retired. I have a pension that can pay me $760/mo. or a lump sum of about $120,000. I'm torn. Should I take the monthly payment format or the lump sum? It seems that I could take the lump sum and invest it elsewhere and do better job investing it. Right or wrong? — Bill H., Birmingham, Ala.

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A: Yes, maybe. And then again, maybe not.

Pension managers who offer this option are really asking you to make a bet with them. There are two important variables that they don't know, and neither do you: 1) how long you're going to live and 2) the rate of return they (or you) will get on that $120,000. (You also don't know much inflation will eat away at that money over time, but that will diminish your income whether you invest it or they do.)

So the first step in making this decision is to do the math both ways. If you take the $760 a month, you'll get paid a total of $120,000 in a little over 13 years.

But let's say you take the lump sum. If you figure a rate of return of 5 percent (better than you'll find today in money markets, but historically not unreasonable), and a monthly withdrawal of $760, you'll have $63,031.55 at the end of 13 years. At that point, you're ahead if you take the lump sum and invest it now.

But if you keep pulling money out of that investment, it will dry up after around 21 years. (After that point, the pension manager wins.) Here's an online calculator to help you play with the numbers.

There are other considerations: If you take the lump sum and invest for capital gains, for example, you may pay less tax than you would for pension income.

But in the end, this is not entirely a math problem. Do you like managing your own investments? Or do you prefer the security and convenience of knowing you'll get a fixed payment -- no matter what? Is the pension payable to your spouse when you die? (And don't forget to ask yourself: How sound is the company providing the pension? Is there a chance it won't be around in 25 years?)

Either way, it's a gamble. But better to make it an educated gamble than just check one box or the other without running the numbers.